SIE Exam Chapter 1
Which two of the following are characteristics of common stock? I. It has less upside potential than preferred stock. II. It has priority claims over preferred stock on liquidation. III. It represents equity ownership of a corporation. IV. It has more upside potential than preferred stock.
III and IV Common stock represents equity ownership, not debt, of a corporation. It offers more upside potential than preferred stock, but has a lower claim to corporate assets on liquidation.
Common Stock
Represents equity ownership of a corporation Has more upside potential than preferred stock
"Flow Through Principal" in relation to limited partnerships
The "flow-through principal" refers to the flow of profits and losses from the partnership to the investor. This is what made limited partnerships attractive tax shelter investments prior to change in the legislation.
What is the Current Yield for a Preferred stock which has a par value of $100 and a current market price of $95 with an annual dividend payment of 5%? [A] 5.26 % [B] 1.9% [C] 1.31% [D] 5%
A Annual dividend of $5.00 / CMV of $95 = 5.26%
Which of the following are true of warrants? [A] The market price of the stock is below the exercise price when they are issued. [B] All are perpetual. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.
A Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
Which of the following is TRUE of warrants? [A] When the warrants are issued, the market price of the underlying stock would be below the exercise price. [B] They are all issued as perpetual warrants. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.
A Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
Of the securities listed below, which of the following would have the greatest market risk? [A] Common stock [B] Preferred stock [C] Debentures [D] Zero coupon bonds
A Common Stock is considered the riskiest of the securities listed. This type of security is the last to receive residual claim on the corporate assets if liquidation occurs.
Which of the following securities could pay a dividend in cash or in other securities? [A] Common stock [B] Mutual funds [C] Municipal bonds [D] Corporate bonds
A Common stock can pay dividends in the form of cash, stock, stock of other corporations, treasury stock, or products.
A corporation that issued several types of securities is being liquidated. Investors who own which of the following securities will have the most junior claim to company assets? [A] Common stock [B] Convertible bonds [C] Preferred stock [D] Collateral bonds
A Common stock has the most junior claim of the choices listed. Common stock has a "residual" claim on company assets during liquidation, meaning that holders of common stock are lowest on the list of those receiving a portion of company assets.
Rights are best defined by which of the following? [A] A short-term privilege to existing common stockholders to buy new shares in proportion to shares they already own. [B] The ability to receive a fixed cash dividend. [C] A long-term option to buy stock at a set price from the issuing company. [D] The ability to sell stock at a set price for set time period.
A Rights (RTS) are a short-term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a price that is typically lower than the public offering price before the public is allowed to purchase the new shares. Fixed cash dividends are paid on preferred stock. Warrants give investors a long-term option to buy stock from the company at a set price. Put options allow investors to sell stock at a set price for a set time period.
Normally a stock will begin trading ex-dividend on the: [A] business day prior to the record date. [B] business day after the declaration date. [C] business day prior to the payable date. [D] Record date.
A Stock will begin trading ex-dividend on the business day prior to the record date.
All of the following are rights of a common stockholder EXCEPT for the right to [A] vote on important matters such as the Board of Directors. [B] receive fixed cash dividends. [C] inspect certain corporate books and records. [D] receive a stock certificate.
B Common stockholders have the right to receive dividends once the Board of Directors declares a dividend, but dividends are not a right until declared and are not fixed. Dividends on preferred stock are for a fixed percentage or dollar amount and are expected, but are not mandatory. Common shareholders have the right to vote on important matters, inspect corporate books and records, and receive a stock certificate. Remember that preferred shareholders do not normally have the ability to vote, but do get a higher claim on assets than common shareholders.
Which of the following describes Regular-way settlement for common stock transactions? [A] T+1 [B] T+2 [C] T+3 [D] T+4
B For common stock, regular way settlement is the 2nd business day after the trade date (T+2).
Which of the following types of industries would be affected most by changes in interest rates? [A] Automotive [B] Utilities [C] Steel companies [D] Transportation
B Since utilities are highly leveraged, they are greatly affected by changes in interest rates.
All of the following are TRUE about the types or kinds of preferred stock EXCEPT: [A] Participating where shares may receive a dividend higher than the fixed dividend if the company's profits are larger than expected [B] Cumulative where shares accumulate dividends that were skipped in past years [C] Callable where shares may be redeemed by the company at a stated discount from par on certain dates [D] Convertible where shares may be exchanged for shares of common stock at the option of the shareholder
C Callable shares are redeemed at a premium above par, not a discount from par.
A common stockholder in a corporate liquidation has: [A] A priority claim on the assets. [B] A claim on the assets prior to preferred stockholders. [C] A residual claim on the assets. [D] A claim on the assets prior to subordinate lenders but after secured creditors.
C Common Stock holders have a residual claim on the corporate assets. If liquidation occurs common stockholders would be the last to be paid.
ABC Inc. announced a 2-for-1 stock split. An investor owns 100 shares with a current market price of $50 per share. After the split, the investor will own: [A] 50 shares at $200 per share [B] 50 shares at $100 per share [C] 200 share at $25 per share [D] 200 shares at $100 per share
C In a stock split, the number of shares increases and the share price decreases. For example, in a 2-for-1 stock split, an investor who owned 100 shares will now own 200 shares and the price will decrease from $50 per share to $25 per share. The primary purpose of a stock split is to make the shares affordable and, therefore, more marketable to investors
REITs (Real Estate Investment Trusts) have which of the following features? I. Much like limited partnerships, REITs pass profits and losses on to their shareholders. II. 90% of all investment income must be passed on to shareholders in order to ensure special tax treatment. III. Any profits passed on to shareholders of a REIT are not taxable until the REIT shares are sold. IV. Investment in other REITs is acceptable as a real-estate-related activity. [A] I and II [B] I and III [C] II and IV [D] III and IV
C In order to qualify for special tax treatment where profits may be passed on to shareholders and avoid taxation as a corporation, REITs must distribute 90% of income to shareholders and must invest a minimum of 75% of their assets in real-estate related activities. These activities can include investment in other REITs.
Which of the following happens when a company declares a stock split? [A] There is a reduction in the company's earned surplus account and an increase in its capital account. [B] The company's assets are frozen. [C] The proportionate share of ownership in the company by each stockholder does not change. [D] There is no effect on the par or stated value of the stock.
C Since a stock split affects only the existing shareholders, the proportionate ownership of each shareholder would not change.
Place the following in order, highest to lowest, in terms of asset distribution if a corporation is liquidated: I. Preferred stockholders II. Owners of secured debt instruments III. Common stockholders IV. Owners of unsecured debt instruments [A] I, II, III, IV [B] III, I, IV, II [C] II, IV, I, III [D] IV, II, III, I
C The order of asset distribution is taxes, secured debt, unsecured debt, preferred stockholders, and common stockholders. Common stockholders are last on the list and are considered residual owners in the event of a corporate liquidation.
ADR's are used to facilitate [A] foreign trading of domestic securities. [B] foreign trading of U.S. Government securities. [C] domestic trading of U.S. Government securities. [D] domestic trading of foreign securities.
D American Depository Receipts (ADR's) Domestic trading of foreign securities.
Which of the following would NOT be considered an advantage when investing in Real Estate Investment Trusts (REITs)? [A] Potential appreciation in property values [B] Dividend income with competitive yields [C] Provides a liquid investment in an illiquid investment area [D] Weakening demand for real estate
D If property demand was slowing down, that would reduce interest in investments in REITs.
All of the following are common features of preferred stock EXCEPT: [A] If a company desires, it can issue more than one class or series of preferred stock, each of which have different characteristics. [B] A company must pay preferred stock dividends before it can pay common stock dividends. [C] A company may be required to establish a sinking fund for the retirement of callable preferred stock [D] Large stock price fluctuations
D Preferred stock price fluctuations are generally small because the dividend is fixed and there is little upside potential or downside risk.
The primary purpose of a stock split is to [A] increase the market price of the common stock. [B] increase each stockholder's proportionate ownership. [C] increase the assets of the corporation. [D] decrease the market price of the common stock.
D The primary purpose of a stock split is to reduce the market price of the stock which increases the stock's marketability.
A corporation's stock that has been issued and later repurchased by the corporation: [A] Will be cancelled and no longer available [B] Will be considered as "issued" and "treasury" shares [C] Will appear on the corporation's income statement as an administrative expense [D] Will appear on the corporation's balance sheet as an asset under "other investments"
[B] A corporation's stock that has been issued and later repurchased by the corporation is called "Treasury" stock. It is not cancelled and can be issued again in the future. It appears in the balance sheet in the Shareholder's Equity section as a deduction from issued shares.
In a pre-emptive rights offering existing shareholders can do all of the following except? [A] subscribe to the new shares [B] redeem their rights for cash [C] sell their rights to another investor [D] let the rights expire worthless
[B] A pre-emptive right allows an existing shareholder to purchase shares of the new issue of securities. If the existing shareholder decides that they do not want to purchase the new shares they can either sell the rights to another investor or let the rights expire worthless - they CANNOT redeem the rights for cash.
Which of the following are true regarding a limited partner who has invested in a limited partnership tax shelter? [A] The limited partner flexibility concerning the types of investment made by the partnership [B] Limited liability for the limited partners. [C] Possible tax write offs against other passive income for the limited partner. [D] The limited partner has considerable control over management.
[B] and [C] Limited Partners must be "silent" partners and would NOT have control over the types of investments made by the partnership and limited partners DO NOT have control over the management of the partnership. Limited Partners would have limited liability and the possibility of tax write-offs.
All of the following companies are examples of non-cyclical or defensive stocks except: [A] Public utilities such as water and gas [B] Companies selling pharmaceuticals [C] Energy providers [D] Manufacturers of appliances
[D] Cyclical stock tends to rise quickly when the economy turns up and to fall quickly when the economy turns down. Housing and appliances manufacturers are examples of cyclical stocks.
Which of the following is most likely to fluctuate in value during a period of stable interest rates? [A] Cumulative preferred stock. [B] Participating preferred. [C] Senior preferred. [D] Convertible preferred.
[D] Because convertible securities try to maintain parity with the Common Stock - Convertibles would fluctuate more than non-convertibles even when interest rates are stable.
